⚖️Legal Aspects of Management Unit 3 – Contracts and Sales

Key Concepts and Definitions

• Contract a legally enforceable agreement between two or more parties that creates obligations
• Offer a clear, definite proposal by one party (offeror) to another (offeree) to enter into a contract
• Acceptance an unqualified agreement to the terms of an offer, which creates a binding contract
• Consideration something of value exchanged by each party, which is necessary for a contract to be enforceable
• Capacity the legal ability of a party to enter into a contract (e.g., being of legal age and sound mind)
• Legality the requirement that the purpose of a contract must be lawful and not contrary to public policy
• Statute of Frauds a legal principle requiring certain types of contracts to be in writing to be enforceable (e.g., contracts for the sale of goods over $500)
• Breach of contract a failure to perform any term of a contract without a legitimate legal excuse

Elements of a Valid Contract

• Offer and acceptance the clear communication of an offer by one party and its unqualified acceptance by the other
  • Offer must be definite, clear, and communicated to the offeree
  • Acceptance must be unequivocal and mirror the terms of the offer
• Consideration something of value exchanged by each party, which can be a promise, an act, or a forbearance
  • Consideration must be sufficient (have legal value) but need not be adequate (equal in value)
  • Past consideration (something already done or given) is not valid consideration
• Capacity the legal ability of the parties to enter into a contract
  • Minors (typically under 18) and mentally incapacitated individuals generally lack capacity
  • Intoxicated persons may lack capacity if they are unable to understand the nature and consequences of the contract
• Legality the contract must have a lawful purpose and not violate public policy
  • Contracts for illegal activities (e.g., gambling, prostitution) are void and unenforceable
• Mutual assent (meeting of the minds) both parties must have a common understanding of the contract's key terms
• Form certain contracts must be in writing to satisfy the Statute of Frauds (e.g., contracts that cannot be performed within one year, contracts for the sale of real estate)

Types of Contracts

• Express contracts contracts where the terms are explicitly stated, either orally or in writing
• Implied contracts contracts where the terms are inferred from the conduct of the parties or the circumstances
  • Implied-in-fact contracts inferred from the actions or conduct of the parties
  • Implied-in-law (quasi-contracts) imposed by law to prevent unjust enrichment, even if no actual agreement exists
• Unilateral contracts contracts where only one party makes a promise and the other party's acceptance is through performance (e.g., offering a reward for finding a lost pet)
• Bilateral contracts contracts where both parties exchange mutual promises to perform
• Executed contracts contracts where both parties have fully performed their obligations
• Executory contracts contracts where one or both parties still have obligations to perform
• Valid contracts contracts that meet all the necessary legal requirements and are enforceable in court
• Void contracts contracts that are invalid from the beginning and have no legal effect (e.g., contracts for illegal purposes)
• Voidable contracts contracts that can be canceled by one party due to certain defects (e.g., contracts entered into under duress or by minors)

Contract Formation Process

• Pre-contractual negotiations discussions between parties before an offer is made, which generally do not create legal obligations
• Offer a clear, definite proposal by the offeror to the offeree to enter into a contract
  • Offer must be communicated to the offeree
  • Offer can be revoked before acceptance unless it is a firm offer or an option contract
• Invitation to treat (or negotiate) a request for offers or an invitation to bargain, which is not an offer (e.g., advertisements, price quotes)
• Acceptance an unqualified agreement to the terms of an offer
  • Acceptance must be communicated to the offeror
  • Silence generally does not constitute acceptance
• Counteroffer a response to an offer that modifies the terms, which is considered a rejection of the original offer and a new offer
• Battle of the forms situation where parties exchange standard form contracts with conflicting terms
  • Under the UCC, additional or different terms in the acceptance become part of the contract unless they materially alter the offer or the offeror objects
• Consideration the bargained-for exchange of value between the parties
• Execution the signing of the contract by the parties

Contract Performance and Breach

• Performance the fulfillment of contractual obligations by the parties
  • Complete performance occurs when a party fully performs their obligations
  • Substantial performance occurs when a party performs most of their obligations with only minor deviations
• Breach of contract a failure to perform any term of a contract without a legitimate legal excuse
  • Material breach a substantial failure to perform that goes to the heart of the contract and justifies termination by the non-breaching party
  • Minor (or partial) breach a less significant failure to perform that does not justify termination but may entitle the non-breaching party to damages
• Anticipatory breach (or repudiation) occurs when a party unequivocally indicates, through words or actions, that they will not perform their obligations before performance is due
• Impossibility (or impracticability) a defense to breach where performance becomes impossible or extremely difficult due to unforeseen circumstances beyond the parties' control
• Frustration of purpose a defense to breach where an unforeseen event substantially frustrates the principal purpose of the contract
• Discharge the termination of contractual obligations through performance, agreement, breach, or operation of law

Sales Contracts and the UCC

• Sales contract a contract for the sale of goods governed by Article 2 of the Uniform Commercial Code (UCC)
  • Goods tangible, movable personal property
  • UCC applies to transactions in goods, not services or real estate
• Merchant a person who deals in goods of the kind or holds themselves out as having special knowledge or skill regarding the goods
  • Merchants are held to a higher standard of good faith and fair dealing under the UCC
• Formation of sales contracts
  • UCC relaxes some common law rules (e.g., mirror image rule, consideration)
  • Firm offer a merchant's written offer to buy or sell goods that is irrevocable for a reasonable time (up to 3 months)
• Warranties promises or guarantees about the quality or characteristics of the goods
  • Express warranties created by the seller's affirmations, promises, descriptions, or samples
  • Implied warranties arise automatically by operation of law (e.g., warranty of merchantability, warranty of fitness for a particular purpose)
• Perfect tender rule under the UCC, the buyer may reject goods if they fail to conform to the contract in any respect
• Cure the seller's right to remedy non-conforming goods within a reasonable time after rejection
• Acceptance occurs when the buyer signifies to the seller that the goods are conforming or retains the goods without objecting
• Revocation of acceptance the buyer's right to revoke acceptance of non-conforming goods within a reasonable time if the non-conformity substantially impairs the value of the goods

Remedies for Breach of Contract

• Compensatory damages money awarded to the non-breaching party to compensate for losses caused by the breach
  • Expectation damages designed to put the non-breaching party in the position they would have been in had the contract been fully performed
  • Reliance damages designed to put the non-breaching party in the position they would have been in had the contract never been made
  • Restitution damages designed to prevent the breaching party from being unjustly enriched
• Consequential damages indirect losses that are a foreseeable result of the breach (e.g., lost profits)
• Liquidated damages a predetermined amount of damages agreed to by the parties in the contract
  • Enforceable if reasonable and not a penalty
• Specific performance an equitable remedy ordering the breaching party to perform their obligations
  • Granted when money damages are inadequate and the subject matter of the contract is unique (e.g., real estate, rare goods)
• Injunction an equitable remedy ordering a party to refrain from certain conduct
  • Negative injunction orders a party to refrain from breaching the contract
  • Mandatory injunction orders a party to take specific actions to perform the contract
• Mitigation of damages the non-breaching party's duty to take reasonable steps to minimize their losses from the breach

Legal and Ethical Considerations

• Unconscionability a doctrine that allows courts to refuse to enforce contracts or clauses that are extremely unfair or oppressive
  • Procedural unconscionability relates to the process of contract formation (e.g., unequal bargaining power, lack of meaningful choice)
  • Substantive unconscionability relates to the actual terms of the contract (e.g., grossly one-sided, oppressive)
• Duress a defense to contract formation where a party is induced to enter into a contract by an improper threat that leaves no reasonable alternative
• Undue influence a defense to contract formation where a party in a position of trust or confidence persuades another party to enter into a contract that is unfair or against their interests
• Misrepresentation (or fraud) a false statement of material fact that induces a party to enter into a contract
  • Innocent misrepresentation a false statement made without knowledge of its falsity or intent to deceive
  • Fraudulent misrepresentation (or deceit) a false statement made with knowledge of its falsity and intent to deceive
• Mistake a defense to contract formation where one or both parties have an erroneous belief about a material fact
  • Unilateral mistake a mistake made by only one party, which generally does not void the contract
  • Mutual mistake a mistake shared by both parties, which may void the contract if it goes to the heart of the agreement
• Good faith and fair dealing an implied duty in every contract to act honestly and fairly in the performance and enforcement of the contract
• Parol evidence rule a rule that prohibits the introduction of evidence of prior or contemporaneous oral agreements that contradict or vary the terms of a written contract
  • Exceptions apply for evidence of defects in contract formation (e.g., fraud, duress) or evidence to clarify ambiguous terms